Why business is still in the dumps

Violence and a shortage of electricity hobble manufacturing

A TANGY sweet smell wafts through a factory south of Baghdad as 1 tonne of brown goo per hour is funnelled into glass bottles for transporting to local supermarkets. Hello is a best-selling barbecue sauce. It is made by Iraqis in a factory owned by Iraqis using Iraqi raw material, mostly dates, which are deemed the perfect culinary accompaniment for grilled lamb. Yet in Iraq itself Hello is still a rarity.

On tightly packed shelves in Iraqi shops it is usually surrounded by rows of imports: Iranian noodles, Turkish milk, German detergent, and so on. With violence receding a bit (but by no means entirely) in the past two years, traders are finding a growing number of customers eager for foreign-made wares, especially without real competition from local ones. Hopes of a spurt in industrial growth rose a year ago when Americans stopped patrolling Iraqi streets, but the much-touted peace dividend has failed to materialise. Most Iraqi factories that functioned before the American invasion, albeit often badly, are still closed. The road to a durable peace and rising prosperity is still blocked.

Adnan al-Reqabi, Hello's general manager, complains he is pumping out only slightly more sauce now than last year and his staff of 90 has not grown. Production slowed but never stopped in the bad old days when looters and militias lurked outside the metal front gate, he says, “and we're still stuck.”

Iraq is an industrial pygmy if you exclude the oil sector, which provides 95% of government revenue, but employs only 1% of the workforce. Beyond oil, Iraq does not export much of anything. It ranks 175th out of 183 countries surveyed by the World Bank for ease of starting a business. The economy is growing by more than 7% this year, says the IMF, but that is mostly due to investment by foreign oil companies, and they have relatively few jobs to offer. Most Iraqis still have no full-time job.

Businesses face so many obstacles in Iraq that you wonder how people like Mr Reqabi get by. For instance, bosses struggle with transport. Iraq has a good network of roads built for Saddam Hussein's tanks. Yet in order to thwart suicide car-bombers, the government lets lorries enter big cities such as Baghdad only between 4pm and midnight. Mr Reqabi says he may have to rename his barbecue sauce Good Night.

On Iraq's big arterial roads lorries face even more problems. A few years ago policemen set up hundreds of checkpoints under American tutelage. On the 190km (118 miles) of road between Baghdad and Tikrit, to the north, there are more than 40. Once vital for fighting insurgents, they have turned into shady customs stations. Officers demand a $9 bribe if a lorry driver's papers are in order and multiples of that if not. The checkpoints have become so lucrative that officers buy and sell them. Some on the road north to Turkey go for $45,000. Others on the road west to Jordan fetch $20,000.

Entrepreneurs say they would happily pay such “police taxes” if only they could borrow money to get their businesses to grow. But banks charge up to 20% in interest on small loans and sometimes demand 300% in collateral should they need to recoup capital in a fire sale. Recent insurgent attacks are likely to make banks even more reticent. The central bank was bombed on June 13th and the state Trade Bank of Iraq a week later, killing a total of 44 people.

But the biggest obstacle to doing business is a lack of electricity. Few areas across the country get more than three or four hours a day. Mr Reqabi gets just an hour or two, making it impossible to produce mayonnaise, as he has no reliable refrigeration.

To make Hello sauce, which has to be stored at room temperature, he runs a set of generators, dwarfing all other machinery, for eight hours a day. Fuel is his single biggest expense: buying it takes up much of his time. He must get written permission from five different government departments to buy fuel in bulk, since Iraq's refining capacity is limited. Once procured and consumed, Mr Reqabi must then pay for eight hours of mains electricity, since the meter in his factory does not distinguish between different sources of power.

Some firms have learnt to adapt. “Our engineers know how to work without electricity,” says a national phone company's boss, with a straight face. Many others businesses have no such pool of clever improvisers. Public anger boiled over in June when temperatures rose above 50°C and air-conditioning was scarce. Protesters in Nasiriya, south of Baghdad, threw stones at riot police. In Basra, the south's biggest city, they smashed government offices. Police opened fire, killing two.

Fearing an uprising, the caretaker prime minister, Nuri al-Maliki, then pushed out his electricity minister. But few businessmen expect a better service. The electrical network is in such bad shape that blackouts will persist for years, despite the huge amounts already being invested. The infrastructure under Saddam was already crumbling. But corruption in today's government, seven years of violence, fuel shortages at power stations and criminal gangs that divert electricity supplies, have all made things even worse.

The Americans have invested nearly $5 billion trying to improve electricity since their invasion. They have helped raise the number of high-voltage lines in use from 20 to 34. Iraqis nostalgic for Saddam refuse to believe that, overall, the supply of electricity has more than doubled since 2003. It has certainly been more widely distributed; previously, Baghdad took the lion's share. And demand has gone up, according to official sources, by 128%. Freed from the controls that prevailed under Saddam, Iraqis have been buying power-hungry air-conditioners, white goods and satellite television sets. Almost all of them were made abroad.